Guidance for the IRS maze

All of that sounds lovely, except there is a good chance these clients may be exposed to U.S. Internal Revenue Service (IRS) obligations – even though they are not Americans, don’t spend that much time in the U.S. and never intend to use their newly acquired property for anything other than their own personal enjoyment.

If that describes some of your clients, Canadians & The IRS: What You need to Know About Uncle Sam, by Angela Preteau, will be a valuable resource. This book also would help people who: are Americans or are married to one; intend to increase their time in the U.S.; are looking to cover some of the costs of their U.S. real estate through rental income; or plan to pass their U.S. property along to their children one day.

The author, who holds both Canadian (chartered accountant) and U.S. (certified public accountant) accounting designations, is one of Canada’s leading experts on Canada/U.S. tax compliance. Preteau provides guidance to both Canadian and U.S. citizens who live, work, invest and retire on both sides of the border. The book contains some useful examples of U.S. tax regulations that can catch people by surprise.

– For those spending time in the U.S.

– Many people believe that as long as they spend fewer than 183 days per year in the U.S., they won’t be considered U.S. residents for tax purposes. In fact, it’s the number of days in the current year and the two years preceding that go into the calculation.

– As of July 2014, U.S. and Canadian border agents will scan the passports of Canadians entering the U.S. and re-entering Canada to count the actual number of days spent in the U.S.

– Canadians who pass the U.S. “substantial presence test” will have to file a special form with the IRS to claim closer association with Canada to avoid U.S. tax-filing responsibilities.

For non-residents owning U.S. real estate:

– Canadians receiving rental income from U.S.-based property must file a non-resident tax return, showing income and non-personal expenses. In order to file the required form, 1040NR, you must first obtain a U.S. individual taxpayer identification number (ITIN). If the property is jointly owned, both owners must obtain an ITIN and file a 1040NR return.

– If the U.S. property is acquired primarily for rental income, the purchase must be reported on a 1040NR return and full depreciation taken annually, even if there is no rental income for a given year.

– U.S. gift and estate taxes may apply to non-residents upon the disposition of the property.

– In the U.S., 100% of capital gains are taxable; in Canada, it is only 50%. However, U.S. taxes paid can be used as a credit against Canadian taxes payable.

– For cross-border marriages

– Canadians are taxed based on their residency, while Americans are taxed based on their citizenship.

– Children born to U.S. citizens are considered to be U.S. citizens, even if they were born outside the U.S.

– U.S. citizens living in Canada must file U.S. tax returns, although, in most cases, they won’t have to pay U.S. income taxes.

– Canadians moving from Canada to the U.S. are normally deemed to have disposed of almost all their assets at fair market value immediately prior to moving, which may create tax liability.

– A few other notable points

– The U.S. does not have a lifetime capital-gains exemption.

– There is a limit in the U.S. on the capital gains sheltered on the sale of a principal residence.

– Tax treaties between Canada and the U.S. are designed to avoid “double” taxation. However, not all circumstances are adequately addressed; thus, higher than expected taxes can result from improper tax planning.

– Tax treaties apply only to U.S. federal taxes, not to state taxes. Some taxes can be alleviated at the federal level, but still will result in a state tax liability.

Preteau’s book covers a wide range of scenarios and is neatly divided into sections that zero in on a particular situation, including common topics such as going to school or temporarily working in the U.S., doing business there, U.S. inheritances, and gift and estate laws for non-U.S. residents.

Each chapter contains several brief case studies and a tidy summary at the end. While this book needs to be somewhat technical, I found the style to be easily understood and logical. I’m sure there are more comprehensive books on this complex subject; however, for most advisors and their clients, I think you will find this book to be a valuable reference.

Canadians & the IRS: What You Need to Know About Uncle Sam

by Angela Preteau,

Knowledge Bureau;

200 pages, $24.95

*** 1/2

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